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China: Both NDRC and SAIC Shed Light on the Antitrust Scrutiny on Pharmaceutical Industries

Recently published antitrust decisions by China’s two leading antitrust enforcers (addressed to the same Chinese pharmaceutical company) show that the pharma sector remains an antitrust enforcement target in China. Major differences in the way that the cases were investigated by the two agencies are a stark reminder of the need for skilled local advice when advising companies that may become embroiled in Chinese antitrust investigations.

Then, in early February 2016, the National Development and Reform Commission (“NDRC”) published its full decision in a separate case, in which Chongqing Qingyang (which had subsequently restarted supplies of allopurinol) was found to have colluded with competing suppliers of allopurinol based finished dose pharmaceuticals to fix prices and allocate customers and bids. The companies involved in the cartel have been fined RMB 3,995,400 (about USD 618,483) in total.

KEY TAKEAWAYS

These cases show that the pharmaceutical industry remains under heavy antitrust scrutiny in China. Recent reforms to regulations addressing how pharmaceuticals are priced in China have liberalised prices for a wide range of drugs, increasing the role of free market competition. The NDRC and SAIC have both promised that the sector will be a high enforcement priority in the coming years. Their concerns appear to be motivated by a desire to crack down on what is perceived to be excessive pricing. We are aware of further investigations in the pipeline, and expect this trend to continue.

The Chongqing AIC decision on refusal to supply is the first such case this regulator has taken. Requiring businesses to supply or license customers on antitrust grounds is highly controversial around the world. It remains to be seen whether SAIC or NDRC will be emboldened by this case to pursue further similar cases.

The SAIC joins a number of antitrust agencies in its tendency to define pharmaceutical markets narrowly, at the level of individual molecule (in this case allopurinol). Businesses should bear this trend in mind, in particular when assessing the risk of their being considered dominant in pharmaceutical markets.

The cases highlight some differences between the approach taken by the NDRC and SAIC:

Duration / level of analysis: the SAIC investigation took 9 months, and involved a detailed examination of the relevant products, markets and competition. The NDRC investigation was much shorter (2 months). But both timelines are short by international standards – for example, antitrust investigations in the EU tend to be measured in years, not months.

Transparency: the SAIC decision is comparatively detailed, including an analysis of market definition, the relevant conduct and its effects on the market. The NDRC decision is much briefer, omitting both an explanation of the investigation procedure and a detailed account of the unlawful conduct. This is interesting in light of recent comments from stakeholders urging both the NDRC and SAIC to publish more detailed decisions.

Fines: the NDRC’s approach to fine calculation is clear (it looked at the defendants’’ sales of finished dose pharmaceuticals and, in the case of Chongqing Qingyang, excluded intra-group sales). The SAIC appears to have taken into account sales in both the upstream market (for API) and downstream market (for finished dose pharmaceuticals). This may reflect the peculiarities of the case, in that the abuse affected competition in both markets.

THE SAIC INVESTIGATION

Allopurinol based drugs are used to treat gout and kidney stones. Chongqing Qiangyang produces both the active pharmaceutical ingredient (allopurinol) and finished dose pharmaceuticals including this API.

Market Definition: SAIC first identified two relevant product markets: the upstream market for the API and a downstream market for bulk pharmaceutical products containing allopurinol. SAIC considered that drugs based on other APIs were not sufficiently substitutable with those containing allopurinol. This illustrates the potential, seen in other jurisdictions, for downstream pharmaceutical markets to be defined narrowly, at the molecular level. At least two prior EU merger decisions also suggest such an approach is justifiable in respect of this molecule.[1]

Dominance: SAIC then assessed dominance. It found that Chongqing Qiangyang had a de facto monopoly in relation to the API. There are no other Chinese manufacturers, and the government has not authorised the import of API produced outside of China.

Abuse: in December 2013, Chongqing Qiangyang entered into a five year distribution agreement with Xiangbaithe. This included a clause preventing Chongqing Qiangyang from supplying the API to other manufacturers without the distributor’s consent. This led to Chongqing Qiangyang ceasing API supplies to competing manufacturers. By March 2014, four of the seven other manufacturers of allopurinol based products had exited the market. Chongqing Qiangyang’s market share downstream had increased from around 10% to 57%.

SAIC imposed a fine of CNY 439,308, representing 3% of Chongqing Qiangyang’s total 2013 revenues derived from sales in the relevant markets (allopurinol and allopurinol based products). A lighter penalty was given considering that Chongqing Qingyang cooperated in the investigation, and proactively took corrective measures, and resumed its supply of allopurinol ingredients from April 2014. In fact, the investigation came to light after Chongqing Qingyang itself approached the Chongqing branch of the SAIC to verify whether the proposed refusal to supply was compliant with the Antimonopoly Law.

THE NDRC INVESTIGATION

The NDRC investigation focused on collusion between Chongqing Qingyang and the three remaining competing manufacturers of allopurinol products, which occurred after Chongqing Qingyang resumed API supplies in April 2014.

The NDRC decision is (by comparison with that of the SAIC) short on detail. It states that the companies held several meetings at which they agreed to raise prices for allopurinol products, as well as taking steps to divide the market (such as allocating customers and bids). However, it does not outline the procedural steps in the investigation (for example, how the conduct came to light) nor does it set out a detailed account of the meetings/contacts which led to the infringements.

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